Microcredit Contracts, Risk Diversification and Loan Take-Up

O. Attanasio, B. Augsburg, Ralph de Haas

Research output: Working paperDiscussion paperOther research output

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Abstract

We study theoretically and empirically the demand for microcredit under different liability arrangements and risk environments. A simple theoretical model shows that the demand for joint-liability loans can exceed that for individual-liability loans when risk-averse borrowers value their long-term relationship with the lender. Joint liability then offers a way to diversify risk and to reduce the chance of losing access to future loans. We also show that the demand for loans depends negatively on the riskiness of projects. Using data from a randomized controlled trial in Mongolia we find that these model predictions hold true empirically. In particular, we use innovative data on subjective risk perceptions to show that expected project risk negatively affects the demand for loans. In line with an insurance role of joint-liability contracts,
this effect is muted in villages where joint-liability loans are available.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages36
Volume2016-020
Publication statusPublished - 23 May 2016

Publication series

NameCentER Discussion Paper
Volume2016-020

Fingerprint

Loans
Microcredit
Risk diversification
Joint liability
Liability
Risk perception
Mongolia
Long-term relationships
Riskiness
Insurance
Risk-averse
Prediction model
Randomized controlled trial

Keywords

  • microcredit
  • joint liability
  • loan take-up
  • risk diversification

Cite this

Attanasio, O., Augsburg, B., & de Haas, R. (2016). Microcredit Contracts, Risk Diversification and Loan Take-Up. (CentER Discussion Paper; Vol. 2016-020). Tilburg: Finance.
Attanasio, O. ; Augsburg, B. ; de Haas, Ralph. / Microcredit Contracts, Risk Diversification and Loan Take-Up. Tilburg : Finance, 2016. (CentER Discussion Paper).
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Attanasio, O, Augsburg, B & de Haas, R 2016 'Microcredit Contracts, Risk Diversification and Loan Take-Up' CentER Discussion Paper, vol. 2016-020, Finance, Tilburg.

Microcredit Contracts, Risk Diversification and Loan Take-Up. / Attanasio, O.; Augsburg, B.; de Haas, Ralph.

Tilburg : Finance, 2016. (CentER Discussion Paper; Vol. 2016-020).

Research output: Working paperDiscussion paperOther research output

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N2 - We study theoretically and empirically the demand for microcredit under different liability arrangements and risk environments. A simple theoretical model shows that the demand for joint-liability loans can exceed that for individual-liability loans when risk-averse borrowers value their long-term relationship with the lender. Joint liability then offers a way to diversify risk and to reduce the chance of losing access to future loans. We also show that the demand for loans depends negatively on the riskiness of projects. Using data from a randomized controlled trial in Mongolia we find that these model predictions hold true empirically. In particular, we use innovative data on subjective risk perceptions to show that expected project risk negatively affects the demand for loans. In line with an insurance role of joint-liability contracts,this effect is muted in villages where joint-liability loans are available.

AB - We study theoretically and empirically the demand for microcredit under different liability arrangements and risk environments. A simple theoretical model shows that the demand for joint-liability loans can exceed that for individual-liability loans when risk-averse borrowers value their long-term relationship with the lender. Joint liability then offers a way to diversify risk and to reduce the chance of losing access to future loans. We also show that the demand for loans depends negatively on the riskiness of projects. Using data from a randomized controlled trial in Mongolia we find that these model predictions hold true empirically. In particular, we use innovative data on subjective risk perceptions to show that expected project risk negatively affects the demand for loans. In line with an insurance role of joint-liability contracts,this effect is muted in villages where joint-liability loans are available.

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Attanasio O, Augsburg B, de Haas R. Microcredit Contracts, Risk Diversification and Loan Take-Up. Tilburg: Finance. 2016 May 23. (CentER Discussion Paper).